Here’s the most interesting thing about the new PPIC poll: One of the most popular ideas with voters is something that almost nobody talks about.
The pollsters ticked off a series of potential tax increases and asked if people favored or opposed each: higher income taxes for the wealthy, a split roll for property taxes, increasing the sales tax on products or extending it to services, and higher taxes on corporations. Not surprisingly, the most popular idea is to tax the rich, which is basically an evocation of Russell Long’s famous motto of American taxation: Don’t tax you, don’t tax me, tax the fellow behind the tree.
But the second most popular idea – favored by 68 percent of respondents – was to increase “the state taxes paid by California corporations.” Ironically, that’s the one idea that doesn’t get much discussion these days.
Of the major initiatives floating around that would raise taxes, none changes the corporate rate. The governor’s plan deals only with income and sales taxes. Molly Munger would raise income taxes broadly. The California Federation of Teachers and Courage Campaign would tax millionaires. The much-ballyhooed and quickly abandoned plan from the Think Long Committee proposed to lower the corporate rate rather than raise it, more than offsetting the lost revenue with a broader sales tax on services, something that was opposed by most respondents in the PPIC poll. It’s true that investor Tom Steyer is backing an initiative that would increase revenues from corporate taxes – the measure would force corporations to pay taxes based on their California sales rather than choosing between that and a more complicated formula – but the real impact of that change would fall on companies based out of state. It would have no impact on the basic corporate tax rate.
For the last 20 or 30 years, this is par for the course. According to the Franchise Tax Board, the basic corporate tax rate peaked in the 1980s at 9.6 percent. Since that time it’s been cut twice – the current rate is 8.84 percent – but never raised. By contrast, there have been plenty of increases, albeit some of them temporary, to income and sales tax rates. The top income tax rate was raised temporarily in the Pete Wilson years and then again in the Arnold Schwarzenegger era. While the corporate rate has been flat or declining, the state portion of the sales tax has gone from 4.75 percent to 6.25 percent. So in recent years, we’ve typically focused tax increases on sales and personal incomes, rather than on corporations.
But if you go farther back in California history, there is a much greater willingness to seek more from corporations. When Pat Brown inherited a deficit from his Republican predecessors, he pushed through a big tax package that included an increase in the corporate rate from 4 percent to 5.5 percent. When Ronald Reagan, sainted father of modern conservatives, inherited a deficit from Brown, he advocated a package of tax increases that took the corporate rate to 7 percent. He went on from there – when Reagan left office in 1975, the state’s corporate rate stood at 9 percent. In 1980, the corporate levy was raised to 9.6 percent, its historic high-water mark.
As any budget wonk knows, the vast bulk of the state’s General Fund comes from just three sources: the Personal Income Tax, the Sales Tax, and the Corporation Tax. Look at the accompanying chart showing the relationship of the three for the past 60 years, and two things immediately jump out. [The graph shows the portion of General Fund revenue derived from each of the three major sources. The underlying data comes from the LAO. The two most recent years shown, 2010-11 and 2011-12, are estimates only. The data is here.
The first and most striking is the oft-noted reversal of the relationship between the personal income tax and the sales tax. Sixty years ago, the sales tax produced almost 60 percent of General Fund revenue, the personal income tax only around 12 percent. Today the numbers are almost inverted: the sales tax brings in only about 21 percent, while the personal income tax produces close to 60 percent. That reflects two trends: the greater portion of the economy dedicated to services, which are not subject to the sales tax, and the increasing progressivity through the years of our personal income tax, which allows us to seize a larger portion of upper-end incomes.
But the second important fact about the chart is the role of the corporate tax in generating revenue. As a portion of the whole, it’s on a long slow decline, having peaked at 18 percent of the General Fund in the mid-60s and fallen now to about 10 percent. Go back to the 1950s, and you will see that corporate taxes consistently produced slightly more revenue than the personal income tax. For the current year, projections are that the PIT revenues will top corporate revenues by more than five-to-one.
I’m not necessarily arguing for an increase in the corporate rate. I understand that corporate taxes are volatile, and we already have too much volatility in the system. Corporate taxes may also create an unfavorable business climate, and it’s true that I have not compared California rates to those of competitive states. (Though surely there is some deadweight to all forms of taxation, and studies have consistently disproven the argument that businesses are fleeing the state in large numbers.) I’m certainly not an economist, but I’ve read convincing arguments that we should move toward some sort of value-added or gross receipts tax, although those sorts of proposals have never gained the slightest political traction and generally seem more like a wonky fantasy than a pending reality.
My point is simply that our political climate has changed. Traditionally, governors facing hard times – Republicans and Democrat alike – looked to the corporate levy as one source of new revenue. Voters apparently think they still should. But our discourse has now become dominated by a conservative economics that sees any imposition on business as a death knell for growth, so nobody really mounts a serious effort to give the voters one of the things they want.
 One interesting and little-noticed historical fact is that the personal income tax was actually more progressive in its early years than it is today. The state created an income tax in 1933, but then increased it sharply in 1935, with a top rate of 15 percent, unmatched in the decades since. Of course, the top rate only applied to income above $250,000 a year, and you had to shovel pretty hard to make a quarter-million dollars in the midst of the Great Depression.